In line with the Government’s objective of freeing India from the menace of black money and with the intention of providing last opportunity to come out clean in so far as the undisclosed income is concerned, the Hon’ble Finance Minister of India, Shri Arun Jaitley, introduced The Income Declaration Scheme, 2016 in the Finance Bill, 2016 and which culminated into a law on 14 May 2016 and which came into force from 1 June 2016. Last year, Government had come out with a similar scheme but in respect of the undisclosed income and assets sourced outside India vide Chapter VI of ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and now they have come out with a scheme for undisclosed income other than that covered by the Black Money Law.
The current scheme provides an opportunity to persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totaling in all to 45% of such undisclosed income declared. Further, as per scheme, declaration of undisclosed income in the form of assets is to be made at Fair Market Value of such assets as on 1st June, 2016.
Since the introduction of the scheme, the CBDT has issued numerous clarifications/FAQ’s as under:-
- Circular No. 16 dated 20th May’2016 Explanatory Notes on Provisions of the Income Declaration Scheme’2016
- Circular No. 17 dated 20th May’2016 Consisting of 14 FAQ’s
- Circular No. 24 dated 27th June’2016 Consisting of 11 FAQ’s
- Circular No. 25 dated 30th June’2016 Consisting of 11 FAQ’s
However, the clarification in shape of FAQ No. 5 issued vide Circular No. 25 dated 30th June’2016 has raised controversy with regard to the effective rate of tax that a declarant is supposed to pay on his undisclosed income. The relevant extract of FAQ No. 5 is reproduced herein as under:-
“Question No. 5: Where a valid declaration is made after making valuation as per the provisions of the Scheme, read with IDS Rules and tax, surcharge & penalty as specified in the Scheme have been paid, whether the department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty?
The aforementioned clarification has led to conflicting interpretations with regard to the effective rate of tax on the undisclosed income declared under the scheme. One school of thought has interpreted it to such an extent that it would reduce the effective rate of tax on undisclosed income declared under the scheme from 45% to 31% citing on the very language of the Question No. 5 and its answer so far as that the department will not make any enquiry in respect of sources of income, payment of tax, surcharge and penalty. This contention can be understood by way of an example given herein under:-
Particulars Amount (in Rs.)
Declaration of income under the scheme 2 Crores
Tax required to be paid @ 45% 0.90 Crores
It is being propounded in some professional circles that the declarant can pay such tax of Rs. 0.90 Crores from another source of Undisclosed Income and the source of tax shall not be enquired by the Income Tax Department in view of FAQ No. 5. The effective rate of tax as argued shall be 31% worked out as under:-
Particulars Amount (in Rs.)
Total declaration of undisclosed income 2.90 Crores
Tax paid under the scheme ( 45% of 2 Crores) 0.90 Crores
Effective rate of tax (0.90/2.90)*100 31%
This very basis of calculation came up in the front pages of numerous leading newspapers, to include, in "The Economic Times" on 2nd July, 2016 propounding the school of thought so far as that the clarification envisages the reduction of effective rate of tax on undisclosed income declared under the scheme from 45% to 31%. The said view has since than not been rebutted nor has been approved by the CBDT till date leading to further uncertainty in the matter.
In absence of any clarity from the Government side, the aforementioned contention as raised in some professional circle is prone to serious litigation and there may be conflicting/divergent legal interpretations which can be derived out of FAQ No. 5 of Circular No. 25 dated 30th June’2016. The clarification issued by the CBDT stating that Department will not make any enquiry in respect of source of income, payment of tax, surcharge and penalty may also be interpreted to mean that in case of deposit of tax in cash on undisclosed income declared, Department will not make enquiry regarding the manner in which income represented by such taxes has been earned.
However, as per the well accepted principles of taxation, it is quite erroneous to assume that the government shall allow or in that case encourage taxpayers to make payment of taxes out of undisclosed income without making disclosure of such amount under the scheme.
On one hand, the scheme requires a person to declare all his undisclosed income relating to earlier years under the scheme which has been given as a last opportunity to the taxpayers to come clean and at the same time how Page 4 of 4 can the government allow taxes to be paid out of undisclosed income without making declaration of such undisclosed income.
Further to the note that if at later stages, the declaration so made under Chapter IX of the Finance Act’2016, is treated as void due to misrepresentation or suppression of facts, such declaration shall be void and deemed to have never been made under the scheme. It is pertinent to quote para 8 of Circular No. 16/2016 dated 20-5-2016 which clarifies as under:
8. In the following situations, a declaration shall be void and shall be deemed never to have been made:— (a) If the declarant fails to pay the entire amount of tax, surcharge and penalty within the specified date, ie., 30-11-2016; (b) Where the declaration has been made by misrepresentation or suppression of facts or information.
Where the declaration is held to be void for any of the above reasons, it shall be deemed never to have been made and all the provisions of the Income-tax Act, including penalties and prosecutions, shall apply accordingly.
Any tax, surcharge or penalty paid in pursuance of the declaration shall, however, not be refundable under any circumstances."
As the declaration shall be deemed never to have been made, no immunity shall be available in respect of penalty and prosecution. Also, tax, surcharge or penalty paid in pursuance of the declaration shall not be refundable. Further, in absence of any clarification on the issue, the Judiciary may strike down such an interpretation treating it contrary to the very intention of the legislature.
Therefore, for the success of the scheme, it is imperative on the part of the Government, to spell out in clear, obvious and explicit terms so far as whether the effective rate of tax is 31% or 45%.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out.